Tags: Stiglitz | Employment | jobs | US

Stiglitz: Full Employment Depends on New Bubble

Tuesday, 06 March 2012 07:39 AM

The gap between rich and poor in the United States created the need for the housing credit bubble, which led in turn to the subsequent credit crisis and economic collapse, says Nobel Prize-winning economist Joseph Stiglitz.

Worse, it would take a new bubble to get back to full U.S. employment, he says.

Income “inequality is bad for growth, stability and efficiency,” Stiglitz told NorthJersey.com after speaking to students nearby. “Inequality peaked both before the Great Depression and before the Great Recession, and it's not an accident. So basically, when we have a lot of inequality, demand goes down.”

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The lack of economic balance created the need for increased consumption on credit, which appeared as home equity lending during the housing boom.

“The bubble allowed people to consume more. Now we have the inequality but we don't have a bubble, and that means that we will have persistent, weak demand, and therefore unless we create another bubble it's going to be very difficult for us to get back to full employment,” says Stiglitz, a former chief economist for the World Bank and adviser to President Bill Clinton.

He suggested that higher taxes on the rich to invest in education, technology, and infrastructure was a solution but rejected the idea that reducing the budget deficit matters to the economy.

Of several “myths,” one hears that “reducing the budget deficit would stimulate the economy by restoring confidence, which you hear over and over again. No evidence that has ever worked. You might call it the austerity myth — that's the most serious one,” Stiglitz said.

“The second one is that raising taxes on upper-income individuals will lead them to save less, invest less, will have adverse supply-side effects. Again, no evidence of that,” he said.

You can count on a third round of Federal Reserve easing (known as QE3) if the stock market falls sharply enough, says Marc Faber, editor of the Gloom, Boom & Doom Report.

The broad market index opened sharply lower as fear of rising oil and doubts about the recovery hover over equities, following a sharp rise since the year began.

“(QE3) depends on the S&P, if the S&P drops 100 to 200 points, then yes, for sure we will have QE3 but if the S&P stays here or even goes up, the likelihood of QE3 diminishes,” Faber told CNBC.

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